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Economic impact will decide Circuit of the America's future with Formula One

December 18, 2012

Formula One charges venues such as Circuit of the Americas in Texas as much $25-30 million for the right to host a race. Photo by LAT PHOTOGRAPHIC

The inaugural United States Grand Prix at Circuit of the Americas near Austin, Texas, was a smashing success in terms of the on-track action and attendance, which track officials reported as 117,429 on race day and a weekend total of 265,499. But its long-term viability likely hinges on its balance sheets.

Formula One boss Bernie Ecclestone this year charged race promoters between $25 million and $30 million to bring his show to Texas, a bill COTA must pay each year. Then there are administrative and logistical costs -- based on what we know of other races on the calendar they likely total almost another $20 million.

F1 tracks and their promoters generally get no money from trackside advertising, TV fees or corporate hospitality. Instead, their sole take tends to be from ticket sales. There are a few exceptions which include the promoters of the Austin race. They have the right to sell the title sponsorship for the USGP, which brings in around $6 million annually to other races. But so far they have no such sponsor.

However, the state of Texas is prepared to help bankroll the race, thanks to a deal arranged by Tavo Hellmund, the Texan entrepreneur who in May 2010 signed the original contract with Ecclestone to bring the sport to Austin. Hellmund got F1 eligible for Texas' Major Events Trust Fund, an initiative designed to attract major sports events, and which may pay up to $25 million toward the cost of hosting them.

If the state pays any money, it will do so after the Grand Prix takes place each year, and the amount given depends on the tax dollars the USGP generates; it comes down to how many spectators attend the race from outside the state.

If the state pays the full $25 million, it will cover almost the entire hosting fee. The organizers will then only have to worry about the running costs since the construction of the $400-plus million venue was funded by outside investors.

USGP tickets started at $159 for general admission and rose to $499 for a seat in the bleachers. Based on comparisons with all other F1 tracks, this yielded an average ticket price of around $230 and a total income of just more than $27 million for this year's event. The organizers also sold “personal seat licenses” to corporations for thousands of dollars each, guaranteeing the buyers ownership of premium seating.

In addition, COTA offered 78 trackside RV sites for a hefty annual payment of $15,000 per spot. If all were sold, that totals $1.2 million. F1 venues also get around 25 percent commission on food and drink sold at onsite stands. This brings in around $1 million while selling premium parking slots makes around half that. Merchandise spaces go for as much as $25,000, with several sold each race. Less expected revenue sources? Helicopter take-off and landing slots can bring in as much as $1.5 million.

If COTA gets a title sponsor at the going rate of $6 million, this would give it total revenue of as much as $37.9 million. Then come the costs. Staff, marketing and vehicles come to around $12.5 million. Office, admin, utilities and insurance cost a further $4 million, with medical expenses requiring a budget of around $2 million. This gives a conservative estimate for total costs of $18.5 million, meaning that the organizers could make a profit of almost $20 million.

The stinger: F1's contracts increase by as much as 10 percent annually. It is unknown how much COTA's fee escalates, but if it is the full 10 percent, by year 10 it will pay approximately $59 million. This would leave a shortfall of $34 million, even assuming that it gets the full $25-million state subsidy.

How much the state pays out is critical. If COTA has to cover a shortfall in the hosting fee, that will eat into any of its profit.

At least two studies analyzing the economic impact will be done -- the results of which are now key to the facility's long-term F1 future.